The latest proposal for sweeping tax changes just arrived, and while many important details are still in up to individual committees, there are already at least five significant changes heading our way.
The latest proposal comes from the Republicans in Congress and impacts most Americans, though some tax brackets will see more changes than others; some brackets will be eliminated.
Here’s what to expect:
The latest plan cuts the number of tax brackets Americans can be sorted into from seven to just four. For a married couple, the 39.6% tax bracket would not apply until $1 million in annual income was earned. For individuals, the limit for this bracket is $500,000.
One of the main goals of the tax reform plan is to reduce the complexity and sheer difficulty of annual tax filings and forms. As part of the initiative to make taxes easier to understand and forms easier to complete, many individual deductions and write-offs would be removed. These deductions would be replaced by an increase in the standard deduction.
The deduction for charitable donation is sticking around, as are many of the benefits of home ownership.
Deductions on the chopping block include those for medical expenses, casualty losses and local/state income taxes. Less common deductions like those for moving expenses, alimony and some education related expenses will be going away as well under this new plan.
Right now, about 70% of Americans use the standard deduction instead of itemizing; these individuals and couples will see their standard deduction double under the new plan, meaning more money will be kept in their pockets and households.
For those who used to rely on deductions for the best possible outcome, the simplified process will replace the onerous task of calculating all those deductions. Instead, the higher standard deduction would be taken by these individuals and couples as well.
The new deduction will be $12,000 for individual filers and $24,000 for joint filers. The amount is set to rise and adjust over time for inflation.
The new tax plan changes the way homeownership impacts taxes. If you own a home right now, you can still deduct your mortgage interest, but people buying homes once the new tax code passes can only deduct interest for up to $500,000 in debt annually. The former cap was a million dollars.
The other big change for home owners is for those who apply for and receive mortgages after November 2, 2017. These homeowners will only be able to deduct mortgage interest for primary residences – not a primary and one second home as in previous years.
Most significant for home owners in high tax states like Illinois and New Jersey, the new proposal caps property tax deductions to $10,000 annually. This could be a significant reduction for those in the costliest zip codes or with the largest or most expensive properties.
Right now, if you sell your home, you do not have to pay taxes on the first $250,000(individuals) to $500,000 (couples) of gains. The new plan extends the amount of time you must use your home as a primary residence to qualify.
Deductions get all the press, but credits work in your favor to reduce your actual tax bill. The new plan will provide a credit for families, expanding the current child credit from $1,000 to $1,600. An additional credit of $300 for each adult in the family has been added as well.
For a family with 3 kids and 2 adults, the old plan would result in a credit of $3,000; the new plan would increase that amount to $5,400 per year for the same family. In addition to this change, the existing child and dependent care credit remains unchanged, as does the Earned Income Tax Credit.
While many of the proposed changes are designed to help the middle class, wealthy individuals will appreciate the commitment to repeal the “death tax” or estate tax currently in place. This tax would be rolled back after six years.
For most Americans, the new tax code represents a significant improvement. The reduction in complexity and overall tax amount combined with a boost in deductions will benefit all but the wealthiest in the nation.
Regards,
Ethan Warrick
Editor
Wealth Authority
